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Estimating the FEER for the Czech Economy

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  • Katerina Smidkova

    (Czech National Bank)

Abstract

When currency turbulences hit the Czech crown in May 1997, the research presented in this paper had been nearly finished. It tried to contribute to the discussion of sustainability of external development of the Czech economy by comparing signals given by a set of indicators to signals implied by the estimates of fundamental equilibrium exchange rate for the Czech crown. Interestingly, the method of indicators did not give an unambiguous answer. Specifically, when applied on the Czech data, debt as well as solvency indicators did not imply a danger of external crisis. Financial indicators with a shorter-time horizon did send some warning signals. Indicators of competitiveness watched by large international investors considered the Czech crown to be overvalued since 1995. In order to gain more decisive conclusion on the danger of external crisis, the structural approach was employed. The model simulations of the FEER indicated that the Czech crown became overvalued in 1996 with respect to the central parity of the exchange-rate band. This conclusion was quite robust taking into account behavior of both the real economy as well as decisive external financial flows. The Czech experience with currency turbulences provided an unintentional measure on how good the warning indicators were. The FEER methodology was able to conclude that there was a need for a policy shift in the end of 1996 although it did not give the clear warning that the exchange-rate regime itself was not sustainable.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0303014.

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Length: 31 pages
Date of creation: 21 Mar 2003
Date of revision:
Handle: RePEc:wpa:wuwpma:0303014

Note: Type of Document - ; pages: 31 . WP IECNB No 87
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Web page: http://128.118.178.162

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Keywords: fundamental real exchange rate czech;

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  1. Calvo, Guillermo A. & Mendoza, Enrique G., 1996. "Mexico's balance-of-payments crisis: a chronicle of a death foretold," Journal of International Economics, Elsevier, vol. 41(3-4), pages 235-264, November.
  2. László Halpern & Charles Wyplosz, 1997. "Equilibrium Exchange Rates in Transition Economies," IMF Staff Papers, Palgrave Macmillan, vol. 44(4), pages 430-461, December.
  3. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 534, Board of Governors of the Federal Reserve System (U.S.).
  4. Gian Maria Milesi-Ferrett & Assaf Razin, 1996. "Current Account Sustainability: Selected East Asian and Latin American Experiences," NBER Working Papers 5791, National Bureau of Economic Research, Inc.
  5. International Monetary Fund, 1996. "The Economic Content of Indicators of Developing Country Creditworthiness," IMF Working Papers 96/9, International Monetary Fund.
  6. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17, July.
  7. Barrell, Ray & Wren-Lewis, Simon, 1989. "Fundamental Equilibrium Exchange Rates for the G7," CEPR Discussion Papers 323, C.E.P.R. Discussion Papers.
  8. Steven A. Symansky & Peter B. Clark & Leonardo Bartolini & Tamim Bayoumi, 1994. "Exchange Rates and Economic Fundamentals," IMF Occasional Papers 115, International Monetary Fund.
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Cited by:
  1. Andrea Saayman, 2007. "The Real Equilibrium South African Rand/US Dollar Exchange Rate: A Comparison of Alternative Measures," International Advances in Economic Research, International Atlantic Economic Society, vol. 13(2), pages 183-199, May.
  2. Rahn, Jörg, 2003. "Bilaterial equilibrium exchange rates of EU accession countries against the euro," BOFIT Discussion Papers 11/2003, Bank of Finland, Institute for Economies in Transition.
  3. Horvath, Julius & Jonas, Jiri, 1998. "Exchange rate regimes in the transition economies: Case study of the Czech Republic: 1990-1997," ZEI Working Papers B 11-1998, ZEI - Center for European Integration Studies, University of Bonn.
  4. Lubos Komarek & Zdenek Cech, Roman Horvath, 2003. "ERM II Membership - the View of the Accession Countries," Working Papers 2003/11, Czech National Bank, Research Department.
  5. Égert, Balázs, 2004. "Assessing equilibrium exchange rates in CEE acceding countries: Can we have DEER with BEER without FEER? A critical survey of the literature," BOFIT Discussion Papers 1/2004, Bank of Finland, Institute for Economies in Transition.
  6. Jovanovic, Branimir, 2007. "Calculating the Fundamental Equilibrium Exchange Rate of the Macedonian Denar," MPRA Paper 43161, University Library of Munich, Germany.
  7. Julius Horvath, 1999. "The May 1997 Currency Crisis in the Czech Republic," Post-Communist Economies, Taylor & Francis Journals, vol. 11(3), pages 277-298.

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